I am a Tax Partner in WithumSmith+Brown’s National Tax Service Group and the founding father of the firm's Aspen, Colorado office. I am a CPA licensed in Colorado and New Jersey, and hold a Masters in Taxation from the University of Denver. My specialty is corporate and partnership taxation, with an emphasis on complex mergers and acquisitions structuring. In the past year, I co-authored CCH's "CCH Expert Treatise Library: Corporations Filing Consolidated Returns," was awarded the Tax Adviser's "Best Article Award" for a piece titled "S Corporation Shareholder Compensation: How Much is Enough?" and was named to the CPA Practice Advisor's "40 Under 40."

In my free time, I enjoy driving around in a van with my dog Maci, solving mysteries. I have been known to finish the New York Times Sunday crossword puzzle in less than 7 minutes, only to go back and do it again using only synonyms. I invented wool, but am so modest I allow sheep to take the credit. Dabbling in the culinary arts, I have won every Chili Cook-Off I ever entered, and several I haven’t. Lastly, and perhaps most notably, I once sang the national anthem at a World Series baseball game, though I was not in the vicinity of the microphone at the time.

Analysis Of Chairman Camp's Proposal For Tax Reform, Part II: The Business Tax Proposals

Chairman Camp’s proposal would shut down the carried interest “loophole” by providing that certain partnership interests held in connection with the performance of services would be subject to a rule that characterizes a portion of any capital gains as ordinary income. An applicable partnership interest would include any interest transferred, directly or indirectly, to a partner in connection with the performance of services by the partner, provided that the partnership is engaged in a trade or business conducted on a regular, continuous and substantial basis consisting of: (1) raising or returning capital, (2) identifying, investing in, or disposing of other trades or businesses, and (3) developing such trades or businesses. The provision would not apply to a partnership engaged in a real property trade or business.

Commentary

The carried interest loophole has been under attack for years, with President Obama repeatedly proposing to shut it down. To see the treatment of carried interest as ordinary income proposed by a Republican, however, is quite surprising, as in the past, Republicans have been loath to increase taxes on investment income of any variety. It is my guess that if the Republican Party will quickly and publicly distance themselves from any one provision in Camp’s proposal, this will be the one.

Other Issues

Section 754 adjustments upon a cross-purchase or distribution would become mandatory rather than elective. If this means nothing to you, look for a future Tax Geek Tuesday post on the topic.

A long-standing loophole in the partnership rules would be closed. Under current law, a partner can only utilize a loss to the extent of his basis in the partnership interest. In a little-known nuance to the law, however, charitable contributions are not counted towards this limitation; thus, a partner can deduct a charitable contribution even if it exceeds his remaining basis. The Camp proposal would shut this down.

Under current law, if there is a 12-month period in which more than 50% of the partnership’s outstanding interests are sold or exchanged, the partnership is deemed to terminate under Section 708. The partnership is then deemed to reform, reducing the problems caused by a technical termination to largely an administrative one. Chairman Camp’s proposal would do away with the technical termination concept.

International Issues

Change in the current U.S. “deferral system” of international taxation

Under current law, domestic corporations generally are taxed on all income, whether earned in the United States or abroad. Foreign income earned by a foreign subsidiary that is owned by a U.S. corporation, however, generally is not subject to U.S. tax until the income is distributed as a dividend to the U.S. corporation. To mitigate the double taxation on earnings of the foreign corporation, the U.S. allows a credit for foreign income taxes paid when the income is repatriated.

Camp Solution

U.S. shareholders owning at least 10% of a foreign subsidiary would include in income for their last tax year beginning before 2015 their pro rata share of the post-1986 historical E&P of the foreign subsidiary to the extent such E&P has not been previously subject to U.S. tax. The E&P would be bifurcated into E&P retained in the form of cash, cash equivalents, or certain other short-term assets, and E&P that has been reinvested in the foreign subsidiary’s business (property, plant and equipment). The portion of the E&P that consists of cash or cash equivalents would be taxed at a special rate of 8.75%, while any remaining E&P would be taxed at a special rate of 3.5%. Foreign tax credits would be partially available to offset the U.S. tax.

At the election of the U.S. shareholder, the tax liability would be payable over a period of up to eight years, based on a schedule of 8% of the net tax liability in each of the first 5 years; 15% in the sixth year; 20% in the seventh year and 25% in the eighth year.

Commentary

When switching from the current “deferral system” to a “territorial system,” – one that permits a foreign subsidiary to pay tax on income earned overseas only to the foreign country in which the income is earned, with no double taxation when the income is repatriated to the U.S. – the biggest hurdle is generally how to deal with the billions of dollars that are currently parked overseas and have never been taxed within the U.S. Some favor a tax holiday, whereby all of the overseas earnings could be repatriated free from U.S. tax. Chairman Camp is taking the opposite approach, and requiring that before he moves to a full territorial system, U.S. corporations pay U.S. tax on the income they have stashed away in foreign affiliates, albeit at a greatly reduced rate and over a period of years.

Other International Issues

Under Camp’s proposal, 95% of dividends paid by a foreign corporation to a U.S. corporate shareholder that owns 10 percent or more of the foreign corporation would be exempt from U.S. taxation. No foreign tax credit or deduction would be allowed for any foreign taxes (including withholding taxes) paid or accrued with respect to any exempt dividend.

My overall reaction to the Camp proposal is that it is thorough, well-designed, and this is almost shocking to say in this day and age, unbeholden to any party line. It’s almost as if someone was able to set aside partisan politics for just long enough to allow common sense to rule the day, which is exactly what our tax law needs. Are there shortcomings? Of course. Are there items I’d like to see included that were missing? Sure. But in general, this is exactly the kind of bold opening salvo we needed to incite a move towards meaningful reform, and I hope that Congress takes it very, very seriously.*

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